A misapprehension of progressive leftists is that the tax reform bills under debate by the GOP will revoke something from the needy: the poor, cancer patients, the working class, the aged, you name it. Well, that is a misapprehension held by many earnest leftists, but it amounts to deceitful rhetoric from others. David Harsanyi, in an article aboutthe Left’s penchant for corrupting the English language, attempts to set the record straight:

“Whenever the rare threat of a passable Republican bill emerges, we learn from Democrats that thousands, or perhaps millions, of lives are at stake. …

… the most obvious and ubiquitous of the Left’s contorted contentions about the tax bill deliberately muddles the concept of giving and the concept of not taking enough. This distortion is so embedded in contemporary rhetoric that I’m not sure most of the foot soldiers even think it’s odd to say anymore. … Whatever you make of the separate tax bills the House and Senate have passed, though, the authors do not take one penny from anyone. In fact, no spending is being cut (unfortunately). Not one welfare program is being block-granted. Not one person is losing a subsidy. It’s just a wide-ranging tax cut without any concurrent spending cuts.“

The Left may have a basic math incompetency, or maybe they know better when they insist that the GOP plans will inflict a new burden on the middle class. The middle class actually receives larger reductions in taxes than higher strata. Veronique de Rugy highlighted this point recently:

“President Trump’s intention to give a real tax break to the middle class is counter-productive considering the middle class barely shoulders any of the income tax as it is. The top 10 percent of income earners—households making $133K [or more], not $1 million as most assume—currently pay more than 70 percent of all income tax revenue. The middle quintile pays, on average, 2.6 percent of the federal income tax.

And yet, in both the House and Senate plans the middle class receivesthe largest tax relief by reducing their marginal tax rates, increasing the child tax credit and doubling the standard deduction. The result is fewer taxpayers would be paying income tax at all, problematic from a small government perspective. It also means a more progressive income tax code than it already is.

The House plan also effectively jacks up the top marginal rate for some high earners by using a 39.6 percent bubble rate on the first $90K earned by single taxpayers making $1 million and married taxpayers making $1.2 million and a 12 percent rate like everyone else.“

I have listened to horror stories about school teachers who, in the past, were able to deduct supplies they purchased for their students. Now, the cruel GOP is trying to take that away! This argument neatly ignores the doubling of the standard deduction. Many teachers will find that it no longer makes sense to itemize deductions, and they will come out ahead. But for the sake of argument, suppose a teacher earning $50,000 itemizes and spends $2,500 on unreimbursed supplies for their students every year. At the Senate plan’s new rate in that bracket, the lost deduction will cost the teacher $550, but about $300 would be saved via rate reductions for every $10,000 of taxable income. The teacher is likely to come out ahead even if he unwisely passes on the improved standard deduction.

Liberal thought-whisperers have goaded their minions into believing that the GOP intends to cut Medicare funds by $25 billion a year going forward. The bills under discussion would do no such thing. However, in a rare gesture of fiscal responsibility, President Obama in 2010 signed the Statutory Pay-As-You-Go Act (Paygo), which may require automatic reductions in outlays when spending or tax changes lead to an increase in federal debt. The act has never been enforced, and Republican leadership in both houses insists that Paygo can and will be waived. Clearly, the GOP’s intent is not to allow the Paygo cuts to take place. Even the left-leaning Snopes.com is reasonably neutral on this point. But if Paygo takes hold, the lefties will have themselves to blame.

At the last link, Snopes also touches on one actual provision of the Senate tax plan, the repeal of the Obamacare individual mandate, or rather, the repeal of the “penalty tax” imposed by the IRS on uninsured individuals. The Supreme Court ruled that it is a tax in 2012, at the time giving rise to a mixture of delight and embarrassment on the Left. The ruling saved Obamacare, but the Left had been loath to call the penalty a tax. The supposed rub here is that repeal of the mandate will be greeted enthusiastically by many young and healthy individuals. Freed from coercion, many of them will elect to go without coverage, leading to a deterioration of the exchange risk pools and causing premiums paid by the remaining exchange buyers to rise. However, the critics conveniently ignore the fact that Obamacare individual subsidies will automatically ratchet upward with increases in the premium on the Silver Plan. So the panic related to this portion of the Senate tax bill is misplaced.

One other point about the mandate: because it coerces the payment of cross-subsidies by the young and healthy to higher-risk insurance buyers, the mandate distorts the pricing of risk, the incentives to insure, and the use of resources in the provision of health insurance and health care itself. This is how the proper function of a market is destroyed. And this is how resources are wasted. Good riddance to the mandate. The high-risk population should be subsidized directly, not through distorted pricing, at least until such time as a market for future insurability can be established. As Jeffrey Tucker has said, repeal of the mandate is a very good first step.

The loss of the medical expense deduction is not a done deal. While the House plan eliminates the deduction, the Senate plan reduces the minimum medical expense requirement from 10% to just 7.5% of qualified income, so it is more generous than under current law. I’ve seen bloggers commit basic misstatements of facts on this and other provisions, such as confusing this limit with a total limit on the amount of the medical deduction. This deduction tends to benefit higher-income individuals who itemize deductions, which will represent a higher threshold under the increased standard deduction. Of course, this deduction appeals to our sense of fairness, but like all the complexities in the tax code, it comes with costs: not only does it add to compliance costs and create a need for higher tax rates, but it subsidizes demand for medical care, much like the tax breaks available on employer-provided health care, and it therefore inflates health care costs for everyone. To the extent that these deductions and many others are still in play, the GOP plans fall short of real tax reform.

The GOP tax bills certainly have their shortcomings. I hope some of them are rectified in conference. The bills do not offer extensive simplification of the tax code, and they would not be truly historic: in real terms, an earlier version of the House bill would have been the fourth biggest cut in U.S. history relative to GDP, and I believe the version that passed the House is smaller. However, many of the arguments mounted by the Left against the bills are without merit and are often deceitful. The Left strongly identifies with the zero-sum philosophy inherent in collectivism, and the misleading arguments I’ve cited are plausible to the less-informed among that crowd. That brings me back to David Harsanyi’s point, discussed at the top of this post: “intellectuals” on the progressive Left find value in corrupting the meaning of words and phrases like “budget cuts”, “giving” and “taking”:

“Everyone tends to dramatize the consequences of policy for effect, of course, but a Democratic Party drifting towards Bernie-ism is far more likely to perceive cuts in taxation as limiting state control and thus an attack on all decency and morality.“

“There is a parallel explanation for the hysterics. With failure comes frustration, and frustration ratchets up the panic-stricken rhetoric. It’s no longer enough to hang nefarious personal motivations on your political opponents — although it certainly can’t hurt! — you have to corrupt language and ideas to imbue your ham-fisted arguments with some kind of basic plausibility.“

The tax reform legislation likely to come out of the House and Senate reconciliation process will be far from ideal, but it will be much better than current tax law in several respects (see my last several posts listed in the left-hand margin). One complaint raised by Democrats and others, however, is that the GOP tax compromise will lead to higher budget deficits. Of course they are right, but Democrats fail as legitimate critics given their hypocrisy on the issue of deficit spending. And chronic deficits are ultimately a symptom of government excess. Deficits exist when the polity is unwilling to support the explicit taxes necessary to pay for the spending that politicians are willing and able to authorize.

Nevertheless, there is near-universal consensus that the tax plans passed by the House and Senate would add to the deficit if either were to become law, the biggest exception to that consensus being Republican leadership. The Joint Committee on Taxation (JCT) has estimated that the Senate plan would add $1.4 trillion to the deficit without the benefit of economic feedback. That shrinks to about $1 trillion with the dynamic feedback effect of resultant economic growth. Others believe the gap would be smaller, however. The Tax Foundation, for example, estimates the net cost in tax revenue at $500 billion. Veronique de Rugy quotes a dynamic score by Quantria/Inforum that would put the revenue loss at about $300 billion, based on the starting JCT static estimate. The Tax Foundation, as noted by de Rugy, believes the JCT errs in treating the U.S. economy as a closed economy in which business funding is limited to a fixed pool of domestic saving, and in assuming that the Federal Reserve would attempt to offset the economic growth spurred by the tax cuts. These JCT assumptions mute the economic and revenue responses to tax changes.

But whether you believe the JCT’s estimates or the others, the impact is relatively minor compared to the existing fiscal shortfalls brought on by government excess. Brian Riedl puts the proposed tax cuts in perspective. The 10-year deficit was already projected at $10 trillion, with little apparent concern from Democrats. Riedl notes that the opposition has repeatedly shown itself unwilling to address fiscal problems such as Obama’s deficit legislation, Bernie Sander’s $30 trillion health care plan, and a shortfall in Social Security and Medicare funding of $82 trillion over the next three decades:

“Critics who are unwilling to confront these mammoth spending deficits are in no position to lecture others on the deficit implications of a (comparatively modest) $2 trillion tax cut.“

Jeffrey Tucker, whose posts I usually enjoy, seems to assert that deficits are not worthy of great concern. He offers a negative and somewhat muddled assessment of Ricardian equivalence, the idea that deficit spending is neutral because the expectation of future taxes discourages private spending. Tucker’s position is rooted in impatience with the rhetoric of revenue neutrality, but I think his real point might not be too far from Reidl’s. To his credit, Tucker condemns “fiscal profligacy”. He says:

“To be sure, this is not a defense of fiscal irresponsibility. Debts and deficits are terrible. Fiscal conservatism is a good thing. The budget should always be balanced. But there is one proviso: none of this should happen at the expense of the wealth creators in society: you, me, and the business sector. Government should bear responsibility for its own profligacy.“

I will interpret that last remark generously to mean that Tucker would cut spending to shrink deficits, but he also advocates for the sale of federal assets, which I generally support.

Concern by some Republicans over the deficit effects of tax reform prompted a debate during the Senate negotiations over a so-called “trigger” that would have increased taxes automatically if revenue fell short of certain benchmarks. At the last link, Ryan Bourne explains what a bad idea that would have been. A future revenue shortfall could be attributed to any number of future developments, not all of which would be compatible with a tax hike as a fix. The trigger would also create uncertainty, dampening the positive revenue effects that would otherwise be operative. It’s a relief that the trigger idea was abandoned by the GOP.

Despite the corrosive effects of big government and excessive spending, there is a relatively painless solution to closing the fiscal gap, with or without GOP tax reform. (I use the word “painless” guardedly, because big government inflicts distortions and costs well beyond mere spending levels.) Dan Mitchell has updated his calculations showing that the annual deficit would be eliminated by a decline in the budgeted annual growth of spending from 5.49% to 2.67% over ten years, starting in 2019. That hardly seems draconian, but watch: progressives and even relatively reflective Democrats would call such growth reductions “heartless cuts”. Such is the intellectual integrity of the left.

Many supporters of aggressive anti-poverty efforts take umbrage at any suggestion that government aid might discourage the poor from engaging in productive activities. They imagine an implication that the poor are “lazy”, perfidious or otherwise undeserving of assistance. Whether that is a misunderstanding or merely rhetorical bite-back, the fact is that it is rational to respond to incentives and there is no shame in doing so. Unfortunately, many assistance programs contain incentive traps or income “cliffs” that discourage work effort. This applies to food stamps, rent subsidies, Obamacare subsidies, and many more of the 120+ federal aid programs and other state and local programs.

“I find a significant negative relationship between Medicaid expansion and labor force participation, in which expanding Medicaid is associated with 1.5 to 3 percentage point drop in labor force participation.“

The direction of impact is hardly unique, and as Tyler Cowen notes at the link:

“Work is good for most people, and it is even better for their future selves, and their future children too.“

The negative impact of Obamacare is more massive than the estimate above might suggest. Veronique de Rugy at Reason.com discusses how “Federal Programs Keep People Poor“. While most of her article is about the negative impact of high marginal tax rates on the employment prospects of the poor, she also recalls an ugly CBO estimate of the ACA’s impact:

“In 2014, the Congressional Budget Office—Congress’ official fiscal scorekeeper—revised its original estimate to report that because of the law, by 2024 the equivalent of 2.5 million Americans who were otherwise willing and able to work will have exited the labor force.“

There are several different channels through which the negative effects of the ACA operate: Small employers are incented to limit their hiring and the hours of employees, and federal subsidies (and sometimes state benefits) are available to individuals only so long as they remain below certain income thresholds. Again, this is typical of many government aid programs (the Earned Income Tax Credit (EITC) being an exception). More from de Rugy:

“When the government takes away a person’s benefits as his income goes up, it has the same effect as a direct tax. And remember, when you tax something, you usually get less of it. That means these programs can actually hinder income mobility: In order to continue receiving their government cash, individuals are forced to limit the amount they earn. Thus, they have an incentive not to try to climb the income ladder by putting in extra hours or signing up for job training and educational programs.“

Mises Wire recently carried a reprint of an essay by the great Henry Hazlitt, “How To Cure Poverty“. The gist of Hazlitt’s argument is that government largess simply cannot create wealth for society, but only diminish it. The mere process of redistributing the current “pie” consumes resources, but that is minor compared to the future reduction in the size of the pie brought on by the terrible incentives inherent in income taxation and many government benefit programs:

“The problem of curing poverty is difficult and two-sided. It is to mitigate the penalties of misfortune and failure without undermining the incentives to effort and success. … The way to cure poverty is … through … the adoption of a system of private property, freer trade, free markets, and free enterprise. It was largely because we adopted this system more fully than any other country that we became the most productive and hence the richest nation on the face of the globe. Through this system more has been done to wipe out poverty in the last two centuries than in all previous history.“

Harvard professors Edward Glaeser and Andrei Schleifer have written about “The Curley Effect: The Economics of Shaping the Electorate“, which posits that redistributive policies that are harmful to constituents can be rewarding to politicians. The paper deals with policies that encourage emigration of affluent voters away from cities, but which nevertheless reward politicians by increasing the proportion of their political base in the remaining constituency. It seems to apply very well to many major cities in the U.S. However, it certainly applies more broadly, across states and nations, when affluent people and their capital are mobile while the less affluent are not, especially when benefits are at stake. It’s no secret that promises of benefits are often attractive to voters in the short run, even if they are harmful and unsustainable in the long run.

The welfare state appears to have helped to sustain many of the poor at an improved standard of living after accounting for benefits, or it has prevented them from falling into “deep poverty”. However, it hasn’t succeeded in lifting the poor out of dependency on the state. Pre-benefit poverty rates are about the same as they were the late 1960s. In addition, Christopher Jencks observes that the “Very Poor” have in fact become poorer. That’s discussed in his review of “$2.00 a Day: Living on Almost Nothing in America” by Kathryn Edin and Luke Shaefer. Jencks presents statistics showing that those in the lowest two percentiles of the income distribution have suffered a fairly sharp decline in income since 1999. Many of these extremely poor individuals do not avail themselves of benefits for which they could qualify. In addition, the EITC requires earned income. A job loss is a wage loss and, if it goes on, a loss of EITC benefits. Unfortunately, work requirements are more difficult to meet in the presence of wage floors and other distortions imposed by heavy-handed regulation.

A guaranteed national income has become a hot topic recently. Michael Tanner weighs in on “The Pros and Cons…” of such a program. There are many things to like about the idea inasmuch as it could sweep away many of the wasteful programs piled upon each other over the years. It is possible to construct a sliding-scale guarantee that would retain positive incentives for all, as Milton Friedman demonstrated years ago with his negative income tax concept. However, as Tanner points out, there are many details to work out, and the benefits of the switch would depend upon the incentive structure built into the guarantee. As a political plaything, it could still be dangerous to the health of the economy and an impediment to income mobility. Don Boudreaux has registered objections to a guaranteed income, one of which is based on strengthening the wrongheaded argument that we derive all rights from government. Even more interesting is David Henderson’s take on a basic income guarantee. He finds that the budgetary impact of a $10,000 guarantee would equate to a 30% increase in government spending, and that assumes that it replaces all other assistance programs! Henderson also discusses the public choice aspects of income guarantees, as well as moral objections, and he concludes that there are strong reasons to reject the idea on libertarian grounds.

The economy is riddled with too many subsidies, penalties and bad incentives that distort the behavior of various groups. The well-to-do often benefit from subsidies that are every bit as distortionary as those inherent in many public assistance programs. They should all be swept away to restore a dynamic economy with the potential to lift even more out of poverty. There could be a role for a guaranteed income on the grounds that it is better than what we’ve got. But we should recall the words of Hazlitt, who reminded us that we’ve come so far on the strength of property rights, private initiative, and free trade. Left unfettered, those things can take us much farther than the ugly pairing of beneficence and coercion of the government behemoth.

Remember, the real minimum wage is zero, and state-imposed unemployment is not justice. In the private economy, wages rise with productivity, and that’s true across workers at any point in time, for workers over time, and for workers in different industries over time. Don’t think so? Contrary to the blithe pronouncements of Barack Obama and reports by the union-backed Economic Policy Institute (EPI), there has been no divergence in productivity and pay since the early 1970s. This is shown convincingly by James Sherk in “Workers’ Compensation: Growing Along With Productivity“. Sherk’s work shows that hourly productivity increased by 81% since 1973, while average employee compensation increased 78%. In contrast, the EPI has claimed that productivity grew 91% since 1973, but employee compensation grew just 10%.

How did the EPI (and Obama) reach such a faulty conclusion? Sherk breaks the error into three major parts: 1) comparing the pay of a subset of workers to the productivity of all workers; 2) excluding the pay growth of the self-employed; and 3) inconsistent adjustments of pay and productivity for inflation.

The link between wages and productivity is immutable in a market economy. The state can attempt to short-circuit the relationship, but such intervention comes at the cost of dislocations in resource utilization and damage to well-being. Veronique de Rugy discusses Sherk’s findings and emphasizes the folly in thinking that the government can somehow divorce the pay of workers from their underlying contribution to the value of output:

“One of the assets of the American economic model is a relatively flexible labor market, especially when compared with labor markets in many European countries. It explains some of the consistently lower U.S. unemployment rates and higher economic growth. Unfortunately, this flexibility is increasingly threatened by government policies that would increase the cost of employing workers.“

Populists and statists share some destructive tendencies, such as a fixation on increasing the cost of labor to employers. The current debate over a “living wage” of $15 per hour involves more than doubling the minimum wage in many parts of the country. This is so far out of line with the productivity of low-skilled workers as to make absurd claims that it won’t have a serious impact on their employment. There are employers who won’t be able to survive under those circumstances. There are others who will have to scale back operations. Employers having access to capital in industries such as car washes and fast foodknow that automation is more than viable as a substitute for low-skilled labor. And new labor-saving innovations are inevitable when creative entrepreneurs are confronted with an obstacle like high-cost labor: necessity is the mother of invention. But premature automation is not an obvious consequence to living-wage advocates. And that’s to say nothing of the futures destroyed when low-skilled workers are denied opportunities for work experience.

The connection between wages and productivity is part of a well-functioning economy and it is just as alive and well in today’s economy as ever. The “right” wage cannot be determined by central planners, bureaucrats or legislators apart from productive reality, and the adverse consequences of their attempts to do so cannot be wished away. Only markets that price the real value of productive contributions can put resources such as low-skilled labor to their best use, avoiding the waste inherent in regulation that is always ignorant of dynamic preferences and resource availability.

In advanced civilizations the period loosely called Alexandrian is usually associated with flexible morals, perfunctory religion, populist standards and cosmopolitan tastes, feminism, exotic cults, and the rapid turnover of high and low fads---in short, a falling away (which is all that decadence means) from the strictness of traditional rules, embodied in character and inforced from within. -- Jacques Barzun